Copper Update - Plus Everything Else

Copper, which broke down through key support yesterday has closed below $2.90 per pound and is behaving as I hoped.

I also thought I'd update some of the calls and observations I've posted here over the last few weeks.

The dollar index, the set up which I was most excited on Tuesday about has stalled over the last few days. But the setup is still valid and yet to be disproved.

Silver sold off hard last Friday and continued down on Monday. Has since been a small consolidation zone, but looks like it could continue down.

Gold is still not showing any clear trend at the moment, but if the other metals continue down, it could follow suit. This is counter intuitive to the dollar downage... so we'll see.

Cotton which broke out of a rough basing pattern last Friday on very low IV, is continuing to look bullish. Not a parabolic trend, but very workmanlike.

Orange Juice - Rumours of OJ's demise have been greatly exaggerated. I was a tad enthusiastic in calling a top there... buuuuttt at least it hasn't bolted higher and humiliated me.

Cocoa is still looking bullish, but some profit taking eveident.

Crude. You knew I meant NEXT Christmas, right?

Coffee. Made enough to pay off my tab at the local Cafe'.

This will be my last post before Christmas I think, so HAVE A GOOD ONE!

Cotton Breaks Out

On Tuesday I highlighted some low IV conditions in cotton futures.

Snip from Tuesday:
Well, yesterdays bar might have the bulls sitting up and paying attention, but ostensibly sideways.

What is of interest to option traders is the multi year lows in implied volatility. In the last few days, IV mean has finally decided to collapse below 20% to basically be on a par with statistical volatility, making them look like fair value for the first time in quite some time.

I wouldn't go calling them cheap or underpriced, but buying could finally be considered in my opinion

We are now looking at a breakout of a bit of a ragged basing pattern and including Tuesdays big up day, this looks pretty bullish.

Options at fair value and at multi year IV lows looks like pretty good conditions for a straight out plonk on calls in my opinion.

Cotton - Low Volatility Heads Up

Cotton futures have been doing very little in the last 10 weeks apart from trade in a range from about 51 to 54.4 c/lb.

Well, yesterdays bar might have the bulls sitting up and paying attention, but ostensibly sideways.

What is of interest to option traders is the multi year lows in implied volatility. In the last few days, IV mean has finally decided to collapse below 20% to basically be on a par with statistical volatility, making them look like fair value for the first time in quite some time.

I wouldn't go calling them cheap or underpriced, but buying could finally be considered in my opinion

Price Chart (delayed 20 min)

Orange Juice - The Bear Approacheth

Orange Juice futures have been in a solid uptrend since the middle of 2004 where prices stated at around 55c per pound, raising to a lofty $2.10ish just a couple of days ago.


Then... yesterdays 9.75c dumpage:





Now, as is obvious in this 5 year continuous chart, it is insignificant and not even enough to get near any trend lines one might draw in... not enough to be even immediately visible on this chart.

However, the fundamental news which precipitated this fall could be significant:

The U.S. Agriculture Department's monthly supply-demand report pegged Florida's
2006-07 citrus output at 140 million (90 pound) boxes, up from the 135 million
projected in its October report, which is a 17-year low.
The trade had been
expecting the data to be flat to 3.0 million boxes lower and were surprised by
the USDA's increased estimate.
"We were pricing in a smaller crop. Instead,
it got bigger so you saw people bail out like crazy," a dealer said. ===>>More<<===

Trends *usually have some underlying fundamental/sentiment reason for reversing and I reckon this could be it; so I'll be looking to see how this develops and perhaps for a low risk opportunity to short.

For the moment, just a heads up.

Cocoa Bull Going For A Romp

On December 5, I pointed out on this blog some overpriced volatility on Cocoa Futures, and suggested that selling some premium over this contract could be a good idea.

I also thought that the volatility skew and seasonal tendencies suggest risk on the upside. By implication, and if that risk is accepted as real, delta should be kept long. In other words, sell puts, bull credits or whatever.

That risk turns out to be materializing as Cocoa goes on a bit of a bull romp.

It broke out of resistance drawn on the chart immediately and put in a big bull candle on Friday.

It would have been nice to be long the futures as this contract can rise awefully fast, and it was interesting in that the IV predicted the move.

Cocoa Addendum

As mentioned in the previous post on Cocoa and its Implied Volatility, I said that I perceived the risks to be on the upside (for option writers). Well here is one view from Optimus Futures that lends a bit of weight to that hypothesis.

Cocoa: Trouble in Cote d’Ivoire and Ghana

Political problems have plagued West Africa including the Cote d’Ivoire and Ghana for years now. Cocoa producers in these two major producing countries (60% of world production combined) also have to contend with diseases to their crops, namely the swollen shoot virus. This virus defoliates and can potentially kill cocoa trees in many parts of West Africa. According to a BBC News report on October 13, 2006, some cocoa plantations have been abandoned as the virus continues to spread. The increasing costs of fertilizers (derived from petroleum) and the high cost of anti-virus sprays combined with low prices for cocoa on the open market have made it difficult for farmers to maintain their crops. ===>>More<<===

While this news doesn't appear to be a new revelation, it's worth keeping in mind.

Cocoa Implied Volatility

...is up in the upper reaches of it's yearly range at around 29-30% at the ATM strikes with a nice volatility smile in the near expiries.

By contrast, statistical volatility has been grubbing along at about 20% for 2 months. IV's are well in excess of 10 points higher tan SV in the OTM strikes, so unless we are anticipating a sudden spike in realized volatility, it seems like a good time to me to write some options.

I wouldn't dare suggest which side to write or indeed that one should write options at all(risk disclaimers an' all that), but looking at the history of this time of year in the cocoa market, there seems to be more risks on the upside, which of course is reflected in the skews. I'll be watching to see if the resistance around about here turns out to be resistance.

I have no position here yet, just a heads up.

Not So Fast With The Price Rise Mr Barista

Last week I opined that I would really have to get my trading act together to cope in the potential price rise at Mrs's favourite cafe'. A happy wife is a happy life, so rather than put the khyber on her cafe' society spending, I'll just have to step up my trading performance.

That must mean even more trend-lines right? LOL

Thursdays bar was a grade A reversal, with some solid resistance at the ~125 level for this contract* (not shown on this chart) triggering some solid selling to close lower for the day.

*N.B. Drawing horizontal trendlines can be a challenge with futures because of the cost of carry/contango/backwardation. What mat be a lovely support or resistance on the individual contract, might not be valid on a continuous chart and visa-versa. So a grain of salt is required.

Friday saw the month old trend-line broken with conviction but with some buying off the lows and closing above the August resistance areas (now support?)

My view of support and resistance goes something like this: Support (resistance) isn't support until there is support. In other words, I am watching price action around these arbitrarily drawn lines on the chart for low risk entries (or pyramiding opportunities).

So is there support at the support in this March coffee contract. There is some evidence but no "case closed" yet, and there's still the fib levels below here.

The next question is, is whether this market is in an "El Toro Grande" ( To steal Stuie Johnstons terminology) or just trading within a somewhat messy range?

It is a question that can only be answered with certainty, in retrospect: But one must put their chips on the table.... and if Alfredo the Barista is going to end up charging a fiver for a cup of coffee, I am going to slap that fiver on the counter with fiscal impunity, dammit!

Train Stories

Freight Train of the Day

Frozen Concentrated Orange Juice - Getting very close to the all time high today, closing up 8.55c @ 205c on the January contract. This is a commodity that was around 50-60c in 2004 so anyone with a trend following system and nice wide trailing stop is making a motza out of this contract. Sad to say thats not me.

Train Wreck of the Day

Crude Oil - This is a market that many traders say should be rallying... including me :( My "glitch" turned out to be a derailment. As luck would have it, it happens to be the most dreadful looking chart of the energies. Unleaded, Heating Oil and Natural Gas maintain their basing patterns whereas the bottom has dropped out of crude. I still maintain a position with some adjustments to further limit losses while maintaining upside potential.

Oh No! Please don't say coffee is going up!

Could we be looking at yet another big commodity bull in coffee?

London Robusta coffee has been in a solid uptrend since August that was not replicated in the New York Arabica contract... until late last month.

A big bullish bar off the double bottom punched through the downsloping resistance, launching quite a strong move upwards.

I was expecting a bit more retracement as a spot to possibly to some pyramiding, but yesterdays move off the trendline looks incredibly bullish. I just don't know whether its a good spot to add. But a strong bull doesn't hang about to offer traders a nice comfortable entry... case in point; corn.

If this takes off, so will volatility, so optioneers might want to get long some vega.

I am however, bracing myself for a price rise at my wife's favourite coffee shop. It might just cost me all my profits from trading this contract. :-o